Speed bumps ahead as Asia’s economy picks up

The global economy rang in 2014 on a festive prophecy of a better performance this year.

Growth in the developed world is picking up pace, buoyed by still-low interest rates, with households and companies enjoying their healthiest finances in years.

This is helping to moderate the slowdown in emerging economies. As a result, global indicators of business health ― such as surveys of factory purchasing managers and company and consumer confidence ― are mostly on the rise.

Inflation, the usual flip side of higher growth, is also expected to stay subdued this year owing to stable commodity prices. This will allow policymakers to keep credit conditions loose a little longer, fuelling borrowing and spending.

Another cause for champagne: Tail risks, which refer to unlikely but significant shocks, will be less salient this year, said economist Nouriel Roubini, who is credited with predicting the recent global financial crisis.

“The threat, for example, of a euro-zone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued,” he said last week in a commentary for online think-tank Project Syndicate.

Still, the stars are not all perfectly aligned. Global growth is expected to improve from last year, but will still likely undershoot its pre-global financial crisis levels.

China, which has been in the driving seat of the world economy, struck an inauspicious note in the first days of the new year. Gauges of both manufacturing and services activity fell to four-month lows, underlining the world No.2 economy’s struggle to keep its economic engine humming while trying to plug its structural gaps.

Complicating matters is the United States, whose central bank this month starts the delicate task of unwinding its unprecedented monetary stimulus. Ripple effects are expected around the globe.

The U.S. taper and China slowdown will be two major economic themes this year, but they are not the only ones. Here are four other areas to keep an eye on as well.

Asia’s key challenge this year will continue to be adjusting to the fact that the days of easy money lubricating the wheels of economic growth are over.

Countries that have been over-reliant on plentiful external funding or cheap debt to fuel growth will have to prepare for the pain of less liquidity and rising interest rates, as the developed world weans itself off extraordinary monetary stimulus.

So far, Asian economies have got off to a good start. The U.S. Federal Reserve last month announced its long-dreaded decision to start injecting less money into the financial system and, despite pronouncements of doom, the impact was not serious. This was partly due to the Fed’s assurances that U.S. short-term interest rates will stay low for some time, helping to slow the reversal of money flows from emerging markets back to the U.S.

Vulnerable countries such as India and Indonesia have also put in place measures to reduce their reliance on inflows of foreign capital. But this may not be enough, especially if the U.S. economy grows faster and interest rates rise more quickly than expected.

“The biggest risk to Asia is an unexpectedly strong performance of the US economy that would force the Fed to act more aggressively,” HSBC economist Frederic Neumann said last week.

India, in particular, has shown less commitment to reforms than its peers in the region, China and Japan, which are both embarking on significant structural changes. Among other things, it needs to reduce food and fertiliser subsidies, accelerate infrastructure projects and slash business red tape.

For other Asian policymakers, different adjustments are on the cards - such as corrections in property markets, where asset values have jumped the most since the global financial crisis.

This is already playing out in Singapore: Private home prices fell in the last quarter of last year in their first decline since 2009. Going by market oracles, Hong Kong will be next in line.